Catching up with reality

As the world of finance becomes further removed from the real economy, it can float above the destruction it causes.  But not forever.  Math tends to work and eventually even the folks selling credit default swaps tend to get caught up in the generalized destruction as the rot moves up the food chain.

Now is one of those times.  Thirty-five years of treating the economy like a slum landlord has pretty much destroyed the places where folks from finance can hide from an economic storm.  And now that the Predators have made war on institutions like representative government and the thinking that produced the Enlightenment, socializing their losses at the expense of the wounded forces of Productivity is no longer possible.  Or as the question is asked below, "Who will save the saviors?"

But even after a day of 600 point stock losses, it is never wise to write off the forces of Predation.  These folks have stayed in charge for most of recorded history because they are cunning.  They just got a Democratic President to attack Social Security and Medicare so it would be insane to write them off as losers even when their precious markets are crashing all around them.

Triumph of the Counter-Enlightenment
By: Glenn W. Smith Sunday August 7, 2011  

Reading the news today is like watching a bad disaster movie. As you shout at the screen for the characters not to open the hatch that will flood the ship, they open the hatch. 

The default crisis was sort of like this, with one big difference. A disaster movie “works” because the audience knows something the characters don’t: there’s death behind that hatch. That’s not true of the default drama. 

Washington’s disaster epic actors knew it was an invented crisis. Certainly those who invented it did. And it’s easy for all to see that the continuing global economic crisis – a real crisis – requires increased government spending. Consumers aren’t spending so businesses aren’t spending so consumers aren’t spending. Our collective spending, through government, is the only possible way to recharge the economy.
So what did they do? They opened the hatch. They cut government spending. And in this case, the whole theater gets flooded. 

Could it be that what Rienhold Niebuhr said about morality – individuals could more easily act morally than society – is true of society’s ability to act intelligently? Are we doomed to collective ignorance? War, the global climate crisis, global hunger, and fundamentalist religious mayhem of all kinds would make one think so. 

I don’t think society is doomed by its nature. I think there are those, however, who want to enforce both individual and collective ignorance. They are the forces of the Counter-Enlightenment, and they’ve been with us since the mid-1700s. These just may be their years of triumph.
It is easier to steal from the stupid, especially when the marks equate their enforced ignorance with holiness or salvation. Consider a person who builds a self around belief in angels. He finds it less psychologically troubling to grab for a mythical winged angel as he jumps from the cliff than it is to stop and consider the certain effect of gravity and hard ground on his fate. more

The Economy Wreckers
The Struggle Against Economic Stupidity 

By MARK WEISBROT   August 8, 2011 

All money managers' eyes were on the U.S. jobs report this morning after the U.S. stock market yesterday suffered its biggest drop since 2009 and panic surged through financial markets worldwide. The headline numbers were not as bad as many had feared: the U.S. economy added 117,000 jobs in July and the unemployment rate edged down from 9.2 to 9.1 percent. But the decline in the unemployment rate was due to people leaving the labor force, not finding jobs; and the overall picture of the job market in the U.S. is still terrible. Just 58.1 percent of the U.S. labor force is employed, as bad as it has been since the recession. As my colleague Dean Baker noted, "with the government shedding 30,000 jobs a month, we will be fortunate if the unemployment rate doesn't rise over the rest of the year." 

The weakness of the U.S. economy was part of what sent markets into a frenzy yesterday, but it was not the main part. The eye of the storm this time is in Europe, and the European Central Bank gets the credit for triggering yesterday's events. The ECB announced that it was reviving its program to buy the bonds of distressed governments after a four-month hiatus, but then said that this would not include Italy or Spain.
This set off fears of a financial crisis, for two reasons: first, because of the fear that the financial markets would continue to speculate against Italian bonds, driving interest rates up to the point where Italy would not be able to borrow on the markets and would have to seek loans from the European authorities – as Greece, Ireland, and Portugal have already done. 

Italy's public debt is $2.6 trillion, which is more than triple the entire economies of the other three countries combined. The European authorities – sometimes referred to as "the troika" of the European Commission, European Union, and the IMF – are not yet prepared for a "bailout" for this level of debt. 

The other source of fear concerns the European banks, who have hundreds of billions of dollars lent to Italy and Spain. As the interest rates on these bonds rises and their value shrinks, these banks face problems of liquidity and potential losses. The European banks' problems also contributed to fears of a financial collapse. 

So why did the ECB send such a frightening message to the markets yesterday? The simple answer is they are trying to force the Italian government to do more budget tightening. It's another dangerous game of chicken, which we have seen repeatedly in the eurozone. more

A Beer Hall Putsch By the Rentiers?
The S&P's Coup 

By MARSHALL AUERBACK   August 8, 2011 

So the ratings agencies have reared their ugly heads again. David Beers, head of S&P’s government debt rating unit, announced Friday night that S&P has downgraded the U.S. credit rating for the first time, from AAA to AA. It’s a sham: S&P’s whole analytical framework reflects ignorance about modern money. If the US government -- Treasury and Federal Reserve -- capitulate to this outrageous act of economic extortion, it will effectively be sanctioning a beer hall putsch by the rentier class.

Justifying its decision, Standard and Poor said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future. [On page 4 of its 8-page paper explaining S&P’s downgrading of Treasury bonds, the firm stated, “We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act." Editors.] 

“It’s always possible the rating will come back, but we don’t think it’s coming back anytime soon,” said Beers. 

The response from Treasury was equally inane: “A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said last Friday. 

$2 trillion, $4 trillion, who cares if the S&P is math-challenged? It’s irrelevant! The notion that the US can arbitrarily summon up the ability to register $4 trillion in “savings” demanded by Standard & Poor as the price for upholding America’s AAA rating is nonsensical, as it ignores the impact that the withdrawal of income will have on the overall economy and, by extension, the size of the government deficits that the ratings agencies regularly decry. Credit ratings are based on ability to pay and willingness to pay. A sovereign issuer of its currency, which issues debt in said currency - like the US - always has the ability to make US dollar payments. Whether it chooses to do so is another matter. But that’s a matter of politics, not economics.

The Obama Administration would have been on much stronger ground if it had challenged the constitutionality of the debt ceiling because, if successful, it would have eliminated this threat to the US AAA credit rating once and for all in terms of precluding an unwillingness to pay. You wouldn’t have a bunch of extremists threatening a default on funds which were already appropriated and spent. The ballot box, not the debt ceiling is the way to solve this kind of dispute. 

There is, therefore, an opening for Moody's to gain a competitive advantage over S and P. Moody's can announce that whereas any issuer of its own currency can always make nominal payment on a timely basis, ability to pay is absolute and beyond question for the US government. more

Debt Crises and Market Turmoil
Is The World Going Bankrupt? 

By SPIEGEL Staff   08/08/2011

Europe and the US are hopelessly over-indebted. The crisis that started in the US real estate sector in 2007 has devastated state finances on both sides of the Atlantic and is threatening to wreck the euro and trigger a second global downturn. The world lacks the political leadership needed to end the turmoil.

The fear is back, in the stock exchanges and in the capitals of the industrial nations. There are growing signs everywhere of a new financial crisis, and the political leaders of the West are looking helpless and out of their depth.

The United States is struggling with an enormous budget deficit. And the euro zone's central bankers and government leaders can't find a strategy to end the permanent malaise of their single currency. The White House has achieved little more than to buy some time with a new debt compromise reached after theatrical political squabbling between Democrats and Republicans. Last Friday night, rating agency Standard & Poor's lowered its rating for the US from AAA to AA+.

Muddling through, postponing, playing down -- the motto of the crisis managers on both sides of the Atlantic has sent alarm bells ringing in stock markets. Britain'sEconomist magazine is warning of a double-dip recession in the US, a second downturn just three years after the last one. Many economists have been pointing out that last week's panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008. 

Then as now, banks stopped lending each money. Then as now, banks' cash deposits at the central bank doubled within days. The European Central Bank reacted by assuring banks of unlimited liquidity in the coming months. It was an emergency measure that led to short-term relief but sparked anxious questions among bankers and stock market players. How long can the central bank keep up its market-soothing liquidity operations before it finally loses its credibility, the most important asset of a central bank? Is the financial crisis about to escalate? And will the world then be bankrupt? 

It was less than three years ago that the global economy inched towards the abyss after the US real estate bubble burst. In order to save their over-indebted banks and insurance companies, Western governments borrowed huge sums of money themselves. They nationalized banks and implemented vast stimulus programs, while central banks flooded the economy with cheap money. 

As former German Finance Minister Peer Steinbrück put it, "fire was fought with fire." 

That helped to prevent a global economic crisis of the kind that brought the world to a standstill in the 1930s. But it also set ablaze the headquarters of the world's economic fire-fighters. Who will save the saviors? That question was already being asked back in 2008, and it has gained urgency now that government debt mountains are higher than ever. more